A bad sign for the future of Uber? UberX lowers rates 25 percent in LA

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Uber is temporarily lowering fares by 25 percent in Los Angeles for its low-cost UberX service, the company announced in a blog post Thursday, only six months after it lowered fares in 16 U.S. cities, including L.A., by as much as 30 percent.

The company won't say how long the discounting will last, but the move appears to be aimed at growing or at least maintaining marketshare in the very competitive ride-sharing industry where Uber competes with Sidecar and Lyft, to name a few, which are all trying to further squash out taxis.

Uber just completed a $1.2 billion fundraising round, which values the company at a staggering $18.2 billion, though according to NYU finance professor Aswath Damodaran, writing in FiveThirtyEight Economics, Uber only has a few hundred million dollars in revenue. It's common for start-ups to focus spending on sales and marketing in the early stages of building their business. Uber has also been sending out $30 credits to some customers.

For instance, Uber says a ride from Santa Monica to downtown L.A. now costs $27 on UberX, ten dollars less than before. The company says taking a taxi would cost $53. Going from West Hollywood to LAX now costs $19, which is $7 less than before and $18 less than a taxi.

Of course, this lastest discounting represents more bad news for taxis, which don't have multibillion dollar valuations and can't jack up their rates during peak times, as Uber does.

While fares have dropped, the commissions both Lyft and Uber collect on every ride have seesawed. Uber recently increased the cut it takes on each ride to 20% percent from 5%. Lyft declined to follow and, in fact, temporarily eliminated its 20% commission completely “to provide our growing driver community with peace of mind” during the price drop.

But lower fares still translate into less money for some drivers given steep fare cuts. In a sign of the discord, nearly 100 UberX drivers protested outside Uber’s San Francisco headquarters earlier this month for higher pay. Uber managers tried to make peace by handing out pastries to the protesters. But the company didn’t offer what the drivers really wanted – more money.

Uber's steep discounting also points out a vulnerability for the company. What is it really selling that couldn't be duplicated by an even lower-cost competitor? As The New York Times' Neil Irwin pointed out in a smart article a couple weeks ago, a big question for Uber is whether as it grows it becomes like one of the profitable information industry monopolies like Microsoft or Google, or whether it becomes like a lower margin travel booking website, which compete heavily with each other. From the Times:

So after Uber has done the heavy lifting of hiring lobbyists and fighting the taxi regulators in capitals around the world, acclimating drivers and consumers alike to ride-sharing services and attaining that $18 billion valuation, it will have an enormous bull’s-eye on its back.

You can imagine situations in which both consumers and drivers stick not with Uber but with whichever service offers the best deal at any given moment. Rather than automatically ordering a car through Uber, a person looking for a ride might check several competing services to see which has the closest car at the best price at that moment. Drivers might sign up with multiple services, and take rides that will offer them the highest pay at any given time.

UPDATE 6/20: Uber says the temporary discounts will come out of their pockets, not driver's. The company told KPCC drivers will get to keep 80% of the non-discounted fare.

Previously in The Breakdown

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